Jason Hartman hosts Aaron Kopelson to discuss the current mortgage environment. Lenders are fearful and as a result, are tightening up. Times are changing and the changes are very fast. They look back at the 2008 recession and what created that. Then Jason discusses changes in appraisals.
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Jason Hartman 0:50
it’s my pleasure to welcome Aaron Colson back to the show he was on before speaking as a client doing a client case study but he also who happens to be a very successful mortgage person? So I asked him to come on and update us on the mortgage market. There’s a lot going on out there. Obviously a lot of news, a lot of changes. Banks are worried and they’re reining in their horns. They’re tightening up a little bit. So what are some of these changes? What can we expect? And how does it all mesh together for us, Aaron, welcome back. How are you? Very good. Thanks for having me. It’s good to have you back on last time you want as I mentioned, you were talking as a client, but you’re also in the business, and we wanted to get an update. So we really appreciate you coming on and talking about this. You’ve got a list of bullet points here. You sent me. Take it away. Let’s dive in.
Aaron Kopelson 1:45
Okay, sounds good. You know, what we’re seeing obviously, is a lot of changes going on industry wide, and there’s a lot of kind of mixed messages being sent out. I guess we can kind of start at that 30,000 foot view in terms of What’s going on? And why all the chaos so to speak, in essence, you know, we’re seeing lenders tighten up taking somewhat of a defensive posture. A lot of this is driven from the fact that lenders are, you know, the whole thing with forbearance is becoming more of an issue. And lenders don’t know, hey, if we make you a loan today, are you going to turn around and get into forbearance shortly thereafter, something what we call an industry would be either a first payment default, or an early payment default. in the industry. If you make a loan, and the consumer does not make the first payment, that loan is not deliverable. So you have a non saleable loan and in essence, the lender would be stuck with the loan, it could make its way to let’s say, if it’s an agency product, Fannie Mae or Freddie Mac,
Jason Hartman 2:44
so let’s say Fannie Mae and Freddie Mac, act as the secondary market, and they buy the loans that you are funding and you don’t want to be stuck with the loan on your portfolio. You want to sell it off so you can do more loans and make more money.
Aaron Kopelson 3:00
Right. That’s right. And Fannie and Freddie are government sponsored enterprises. And they more or less set the policies. And they are ultimately the ones buying these and guaranteeing these loans. So, at the end of the day, the buck stops with Fannie and Freddie, most of the lenders that are in the marketplace, the vast majority of them are originating loans with the end goal of selling that loan, and moving on and doing another loan. And that’s where a direct lender or a mortgage banker, those terms are kind of synonymous. And so we don’t service loans, we just make loans and we turn around and more or less rinse and repeat.
Jason Hartman 3:40
Right? Okay, good. The jumbo loan market now, first off, let’s define what a jumbo loan means. And there are different jumbo loan limits in different markets, right?
Aaron Kopelson 3:51
That’s right. So jumbo is synonymous with the word non conforming, depending on your area where you’re at in the country, the base layer is 510,400. And if you happen to fall into a high cost, those limits would exceed that like where I’m at in Orange County, California, it’s about 765,000. Generally, if you go $1, past that conforming loan limit and the area you’re in the county you’re in, it’s going to be a jumbo loan, meaning it can’t get delivered to Fannie or Freddie. And so those loans are made by lenders and they will not sell them off to Fannie or Freddie and they will either put them on their balance sheet as we say they’re going to own those assets and service those funds. Up until recently there were there were big players like Redwood trust and some of these other securitizers as just a fancy term for packaging all the loans together and selling them off and bonds to investors. And that market is pretty much dried up. We were really not seeing any secondary market for those jumbo or those non conforming products and Another kind of variation of that that’s kind of in the same bucket, if you will, in terms of, there’s no real market going on is what we call the non qm market. Now, qm stands for qualified mortgage. So a traditional loan, such as an agency product of Fannie or Freddie product, would be a qualified mortgage, it’s going to have safe harbor. And so that’s the majority of the loans being made. When you think of non qm, probably the easiest way to think about it would be a bank statement loan. So if you have a self employed borrower who has a lot of write offs, and they could prove that the lender that they have sufficient cash flow to to repay the loan, that would be an example of a non qm loan product, and we’ve just kind of seen those disappear, which is very much reminiscent of Oh, 708. You know, when the Great Recession when we just saw loans, everything kind of dried up overnight, and this feels very, very similar.
Jason Hartman 5:52
Yeah. And so what that means is that there’s no appetite from investors that want to buy mortgage backed securities for these non qm loans. And in the example you use, you know, during the Great Recession that got dubbed the liar’s loan, right? And it’s not exactly the same. But yet, you know, conceptually, it’s, that’s the self employed person who’s taking a lot of tax write offs, because our system is weird. And you can take all these tax write offs. But if you’re not going to pay taxes, then the lender doesn’t want to make you the loan on a normal qualified mortgage. So the investors don’t have an appetite to back those products. So therefore, there’s no secondary market to buy those. And so the product pretty much just dries up because no one’s lending for that. Right? That’s right. Okay. And the same is true with jumbo loans. So with jumbo loans, that means the expensive house market is really in jeopardy doesn’t it doesn’t mean that because the dancing has really reduced it’s declined a lot.
Aaron Kopelson 6:59
It’s Has I would say that jumbo market where we’ve seen the biggest pullback would be from brokers and other lenders that are non non banks. The non bank market has seen that dry up, it’s dried up pretty quick. The big banks and community banks and credit unions are still making those loans. And if you’re a well qualified individual, there is still financing there for you. So I don’t want to paint a picture. That seems like that market is just there, there is no market for it, because there is now how that correlates to housing prices and specifically the more expensive homes, your guests is probably better than mine. Well, I say it’s bad news for the more expensive homes because when the financing starts to dry up those sort of the prices you know real estate as a credit backed asset. And anything above sort of necessity level housing is going to experience a hard time when there’s just not as much financing in the marketplace for it. We’ll see how that goes. Okay. Good appraisals has been an interesting topic lately. And I’ve read several articles that say funny things, and I’m not exactly sure I understand them. So pardon my ignorance, but they say, well, you can do the appraisal four months after the deal closes or something. What is this all about? You know, I read an article on housing wire about that.
Jason Hartman 8:21
I think I read the same article. Yeah,
Aaron Kopelson 8:23
what I took from that article was it was really only designed for I believe, credit unions. It was not loans that would end up going to either Fannie or Freddie or a government products like FHA, VA or USDA. So it’s going to be a smaller subset of the market. And yeah, that’s what they were saying that could do it month after now, I don’t participate in that at all. So we won’t necessarily be doing that. But I can speak to what we are doing and that’s most of the loans that we’re doing as a company I’m doing personally are going to be that a paper or family Any free product, the agency product, and that’s the bulk of the marketplace. And what we’re seeing is a lot more appraisal waivers. So what that means is, a lender will initially set a loan up to the application comes in, they’ll fine tune all the numbers and so forth, make sure everything kind of matches the i’s are dotted the T’s and crossed, and they’ll run it through the automated underwriting system. Now, both Fannie and Freddie have their own underwriting software, and will typically run it through both systems and we’ll see if one of them comes back with with a waiver. What that means is you have a standardized census track, and either Fannie or Freddie has enough data in that neighborhood. And the overall characteristics of the file, ie the loan to value, the borrower’s credit scores, to income ratios, all the things that make a loan, and they say we feel comfortable with the value that you entered here. Right. And so we’re seeing a lot more waivers now. We’ve seen the agency lacks those a little bit because In light of what’s going on with all the help stuff, they’re trying to be as helpful as possible. So I’ve seen that just in the last week or two, a lot more of the deals I’ve run through, I believe actually, almost every single one has received an appraisal waiver. Now mind you, a lot of those have been owner occupied deals right now. But what would you say
Jason Hartman 10:17
is the like the percentage of that in the overall market because Aaron, that just smacks smacks of like, a future default problem to me, because this is we got so reckless with appraisals before the Great Recession. And as I said before, nobody in the mortgage funding system was ever paid to slow things down or to stop things. Everybody was just paid to push things forward, meaning the appraisers wanted to bring in the appraisal. The mortgage broker wanted to get the deal done. The real estate agent wanted to get the deal done. You know, the borrower wanted to get the deal done. Nobody was paid to put the brakes on Look at where we ended up, right? Sure.
Aaron Kopelson 11:03
Yeah. I mean, there is a lot of truth in that. And so we, you know, lenders have to kind of play by the rules as they are. And so in this environment, they are I think it’s probably a limited time thing. And I suspect that once that the health thing goes away, we might see that go back to normal standards. By the way, too, when you look at what Fannie and Freddie will allow for, on these appraisal waivers, they do limit it to for example, like a, like an 80% loan to value if it’s a primary residence deal. Now for an investor or investment property. They’re not ineligible, so you won’t you won’t get that so in other words, you would need to order an appraisal and I guess we could that segues nicely to if you don’t get the waiver, well, then what’s available and so Fannie and Freddie are now allowing for exterior only appraisals. Sometimes we refer that as a derived appraisal. Right. And so they’re not going into the property, but they’re going to drive by the price of the subject property, the home that’s being purchased. They’re going to drive by the comps, comparable sales. And they’re going to do everything that they normally would except go inside the property. So we’re getting, we’re allowed to do that, and in some cases, also what they call a desktop appraisal. And that’s just where you’re going to have a licensed appraiser who neither, you know, they’re not going out into the field and looking at properties and taking photos. They’re doing everything via their computer and accessing the MLS and other information sources online. Right. Right. And I
Jason Hartman 12:34
do want to say on balance, you know, sort of balancing my last statement is that this is more acceptable today because the market is becoming more of a perfect market. And what I mean by that is that the data has gotten much better as the industry has been maturing, the algorithms have gotten better. The lenders and the appraisers really know how To do it better, they learned a lot from the Great Recession. And, you know, so to the regulator, so it’s not as reckless as it might seem. So I just want to kind of buffer my last statement a little bit. But, you know, it also gives rise to concern. So there’s a balance there. That’s all I’m saying.
Aaron Kopelson 13:22
I would add one other thing to that, which is I think if you just step back and you go, alright, the person buying this property, probably wouldn’t move forward with the deal if they thought the property was in bad condition or wasn’t up to their own personal so
Jason Hartman 13:35
they got some skin in the game, they got 20% in the game that makes the lender feel better. That’s right. Yeah.
Aaron Kopelson 13:41
Okay, go ahead. Okay. Something else we’re also noticing is high balanced pricing is worse due to market forces. And this has to do with the way that they’re delivered to the agents, Fannie and Freddie. So we’ve seen a big gap between the high balance pricing and the conforming loan amount
Jason Hartman 13:59
is high. Balancing.
Aaron Kopelson 14:01
That’s right, if we’re doing a agency product, a Fannie Freddie loan, up to the you’ve got the $510,400 loan limits, that’s going to be the conforming loan. And a high balance is going to be in the high cost areas, they’re going to basically allow the loan amounts to go higher to account for the more expensive homes. So in California, for example, where I’m at or any really of the sand of the coastal markets, you’re going to have pockets where they kind of fall into that sweet spot. They’re not quite jumbo, but they’re not the normal conforming loan limits, that sort of high balance. We do a lot of that in my market. And so we’re just seeing a dislocation in the prices. And that’s just I think it’s noteworthy. That’s all
Jason Hartman 14:43
Okay, good. Good to know. And again, that won’t really apply to our investors, but it might apply for their personal residence if they own their personal residence. And it’s a you know, a more expensive properties show.
Aaron Kopelson 14:55
Now, in terms of tightening that we’re kind of seeing going on. applies to. That’s right. That’s right. So mortgage insurance, something that I saw recently come out is for investment properties. Two of the big mortgage insurers radian and mgic are no longer allowing for mortgage insurance on investment properties. So your clients that were previously doing the 15% down. Now, I don’t know how many of your clients are actually doing that. But that’s shrinking quick. Right. Okay. So it’s really back that was short lived. Boy, I tell you that didn’t last long at all. It’s back to 20 25%. Right? That’s right. And we see a lot of investors, you know, 25%, kind of that sweet spot to get that bump in the scheme of that lower rate than 20%. Obviously, being the marker for not having mortgage insurance.
Jason Hartman 15:43
So that the market or 15% down has is very small now and maybe probably drying up completely. All right.
Aaron Kopelson 15:51
That’s right. Second mortgages. I think this is also somewhat note note worthy, we’re seeing investors suspend the clothes then the home equity loan Which is different from a home equity line of credit, also known as a key lock. We’re just seeing investors pull out of that. And if you think about it a Hilo is going to have a fixed rate fixed term. And so it puts more of the interest rate risk on the lender. And when they offer a line of credit, that line is going to be tied to the prime rate. And that’s going to basically shift the interest rate risk to the consumer.
Jason Hartman 16:24
Well, I’m just wondering, really do the bank season view that there’s any interest rate risk in this environment? The rates are so low, they might even go negative people say, you know, I wonder if they really even think that’s much of a risk. I don’t know depends how long the term is. Mortgage of that he locker he read, but right. So he locks are adjustable. He loans are fixed, right?
Aaron Kopelson 16:49
That’s right. Got it. And so the adjustable rate, that’s the components are, you know, you got the margin, you got the index, and then you have your cap, and so most lines of credit on homes are tied to the primary. And so that rates can adjust upward down with what the feds do with the Fed funds rate because the prime rate is 300 basis points or 3%, above the Fed funds rate. So they came out and said today, they’re going to be keeping rates low for a really long time, it’s probably we’re probably going to be in my view in a low interest rate environment for quite some time. Right.
Jason Hartman 17:25
Now, one thing and you may not know the answer to this, because it’s not really your side of the business, I don’t think but on the heat rocks, I would imagine that those he locks unused portions of the locks are getting recalled, meaning that if a borrower has a $100,000 he lock on their property, and they’ve only used $20,000 of that he lock. The lender will send them a letter saying, hey, guess what? We know we said you had $100,000 of But because you haven’t used it, we’re gonna shrink it to 50,000. Have you heard of any of that happening?
Aaron Kopelson 18:06
No, I haven’t heard of that. What I was gonna say though is I’ve heard of some big banks like chase are no longer offering key locks. As a product, they’ve temporarily suspended it. They just complete
Jason Hartman 18:18
that whole line of business. Wow.
Aaron Kopelson 18:20
Yeah, I think when you look at that, and you ask yourself, Well, why would they do that? I suspect they’re getting obviously getting defensive, and they’re trying to hang on to as much capital their reserves as possible. So they’re just taking somewhat of a defensive posture there. But the lenders that we work with that offer these lines of credit, we have seen them raise new minimum credit scores. And then also, in some cases, reducing the LTV, that combined loan to value so that clients consumer are just not getting at higher leverage. Many they’re either gonna have more skin in the game, if it’s a purchase or on a cash out, they’re not going to be able to get quite as much cash out. Right, right.
Jason Hartman 18:56
Very interesting. So the He verification of employment. This one a lot of people have heard about, but in a less stable environment like we’re in, the lenders really want to know, you’re keeping your job. And things may have changed since 3045 days ago when you’re applying for this loan, versus when you’re ready to close, right. Tell us more.
Aaron Kopelson 19:21
That’s right. Well, it used to be, you know, before the whole health scare the window with the virus, Fannie and Freddie would require lenders to do a verbal verification within 10 business days prior to the note date. And actually, let me back up a step. It’s a wage earners I’m sorry, yeah, that that’s for wage earners, employee folks, they would require the verification of employment to be done 120 calendar days for those folks. So they’ve just tighten those up now. So what we’re seeing is like at our company, we’re doing it literally just the day before, before we send out the loan docs for both employed borrowers and self employed borrowers.
Jason Hartman 19:59
Okay, so So they’re gonna verify employment right at the end. That’s the basic
Aaron Kopelson 20:04
message here. Right? That’s right. And they’ve just tightened up that that timeframe. So which kind of makes sense, right? Because you know, you might have a job today and not
Jason Hartman 20:13
not tomorrow. Right. That’s understandable on the lenders part. FHA, VA USDA, I still I gotta tell you where and I you still can’t get over talking about USDA when it comes to mortgage financing. I want to think of that as the entity that inspects meat. Okay. The USDA stamp, but they’re into loans as well. So what does this mean overlays?
What’s an overlay?
Aaron Kopelson 20:40
Yeah. So overlays is you have the the government products, FHA, VA, USDA, and they set the policies. So it’s almost like the IRS comes out and writes the tax code that everybody follows will these entities hard come down and say this is the pulse The manual that we want all lenders to follow, what lenders have the ability to do is create an overlay, which means that they can create more restrictive standards, meaning they want to be more conservative. And so we’re just seeing more of that. Now, which makes sense, right? In this environment where there’s a lot of Aaron Kopelsons, there’s a lot seems to be a lot more questions than answers these days with a lot of things. The lenders are just saying, alright, let’s raise the minimum credit score requirements, they may in some cases, reduce the total, you know, the debt to income ratio, and in some cases may want the borrower to have reserves, so reserves or just be how much money are you going to have at the end of the transaction? You know, when it purchased example, after you’ve, you know, brought in your closing costs, if your closing costs and your down payment, right. So for a long time there, there really was none of that and now we’re seeing
Jason Hartman 21:55
Yeah, good to know. So HUD can come out and say these are guidelines, but then other, I’ll just say groups entities, whatever, can say, Well, those may be their guidelines, but ours are a little tighter than that. So we’ll wrap it all up for us with you know, either maybe you’re just your sum total kind of take on the market, what’s the overall vibe? Or where are we going? What are we going to see, you know, a few months from now?
Aaron Kopelson 22:25
Well, a lot of this in the short term has to do with what the government decides to do with helping out mortgage servicers. This is creating a strain, and there’s there’s just a level of uncertainty out there. So I think once lenders have more assurance of what the government’s going to do, and also the health impact, the Fallout, you know, how bad does unemployment get? A big question is, you know, how many people that lost their job are going to be brought back right, you know, right back after the company gets the loan, the PPP loan all in These things have to sort of get worked out to have any clear path. And that’s going to take some time to figure out I think months and months, in my mind at least. Yeah,
Jason Hartman 23:08
yep. I agree with you. I agree with you. And the thing we haven’t mentioned is that the rates with which you can borrow are incredibly attractive. So we’ve been talking mostly about the negative stuff, how much harder it is, and you know, how the lenders are tightening up and making it a little, you got to jump through some more hoops, etc, etc, except raises that’s a little easier, actually. But we didn’t really talk about rates much and maybe you want to make a comment on that and give out your website here.
Aaron Kopelson 23:37
Yeah, I think for me, you know, that your clientele the investor, I think most of your your clients are quality borrowers, they’ve got good jobs, or they run successful businesses. Most of these folks are going to be able to get through the process just fine. And they’re going to be able to capture incredibly low rates. So I think you know for those that follow your recipe for success which is, is buying in good markets where the deal makes sense day one, you’re buying for cash flow, you’re locking in 30 year fixed rate mortgage, most likely in the threes. That is phenomenal when you consider you know, the net cost of the money when you subtract out in addition, and the tax deduction of the mortgage. So all of those things are incredibly powerful. And I think there still is a lot of opportunity out there for investors. And I’m excited to see kind of what this decade brings. And I’m looking personally to keep my eye out for deals or the next year or two and kind of see what opportunities come our way as investors because I think it’s going to be while there may be pain for some like you say crisis you know, it’s it’s a dual edged sword it’s it’s pain for some but for those that are well position, it’s going to be amazing opportunity for them.
Jason Hartman 24:56
Yeah, I couldn’t agree with you more, you know, like the Chinese say The symbol of crisis and opportunity are the same. And it means translated literally, it means crisis is an opportunity writing the dangerous wind. So that’s where we are. I think that yeah, that fits our situation pretty well. So the opportunities are definitely there. Aaron, give out your website.
Aaron Kopelson 25:21
Yeah, my website is hopeless and team that’s, I’m sure you can link to that in the show notes. It’s a little bit of a mouthful, but a couple sent to calm and you can find out more stuff there.
Jason Hartman 25:31
All right. Aaron Colson. Thank you so much for the info. And thanks for joining us and you’re an investor. So I’m gonna say to you happy investing.
Aaron Kopelson 25:39
Thank you, Jason.
Jason Hartman 25:44
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